42 The EastAfrican BUSINESS NOVEMBER 28 - DECEMBER 4, 2015 How p≥oposed mining law can make Kenya a destination fo≥ explo≥ation A s representatives from Kenya’s two Houses of parliament — the National Assembly and Senate — come together in a mediation committee to finalise the Mining Bill 2014, it is time to consider the current state of the global mining industry, some of the key risks faced by both investors and governments in this sector and how they might impact the mining industry in Kenya. The state of international commodity markets is no secret. The so-called super cycle or boom period of 2000-2011 has long passed while the slowdown in China and the sluggish recovery in Europe continue to negatively impact demand. A recent report produced by Deutsche Bank titled Africa: The Next Frontier provides excellent insights into the current state of the extractives sector and how investors view risk on the continent. It states that the current price environment has changed the focus of management teams, with priorities now to “finish in-progress projects, shelve all greenfield options for now…” This approach has seen glo- bal mining capital expenditure cut drastically, with 2016 levels expected to drop to $40 billion from a high of $140 billion in 2012. In a cash-tight phase this ap- proach makes sense. However, it has significant implications for Kenya and the development of its mining industry. While there are currently no “in-progress” projects of substantial size, the shelving of greenfield exploration will further delay the discovery and development of the next large-scale mine. Given the limited geological data available and the underdeveloped nature of the industry, Kenya can be classified as a greenfield investment jurisdiction. The Deutsche Bank report notes that it typically takes 12 years to take a greenfield project into production. By extension, if the trend by companies to shelve greenfield exploration continues of energy will undoubtedly help lower the cost of business for miners. Sustained exploration will increase the likelihood of a significant discovery of polymetallic deposits while it is hoped that the new mining legislation will enshrine security of tenure in the law to counter current negative perceptions. From an investor perspec- tive, the Deutsche Bank report identifies four categories of risk. Interestingly, these are similar to the categories set out in the Fraser Institute Report. These were geopolitical stability, security of tenure, infrastructure requirements and mining input requirements, particularly skilled labour. Scarce resources Deutsche Bank ranks securi- ty of tenure as “by far the most important consideration in assessing prospective mining investment in Africa.” The report argues further that “miners operating in Africa need reliable, stable and pro-investment mining legislation. This is even more critical in the current environment where depressed commodity prices have reduced profits and visibility, and increased competition for more scarce [financial] resources.” Of course, not all the responsi- Titanium mining in Kenya’s Kwale County. The Mining Bill 2014 should consider the state of the global mining industry, key risks faced by investors and governments, and how they impact the mining industry. Picture: File COMMENTARY CLIFF OTEGA “The goal for policy makers is to ensure they respond to changing market circumstances.” for another three years, Kenya could be 15 years away from a new large-scale mine coming into production. It is therefore imperative that the Mining Bill, when finally enacted, focuses on countering the effect of “shelving” greenfield projects by making Kenya stand out as an attractive investment destination for serious exploration. The Deutsche Bank report also notes that just two of the 50 lowest-cost copper/gold/iron ore/coal mines globally are in Africa. Why is this? And how can this situation be improved? Low-cost mines are common- ly characterised by established infrastructure; large ore bodies or high grades; polymetallic deposits (containing two or more minerals that can be simultaneously extracted economically) and security of tenure (demon- strated by minimal government/ stakeholder interference and consistent, fair mining codes). Kenya did not fare well in the 2014 Fraser Institute Report on investment attractiveness for mining, which ranked it second last globally and last in Africa. Since the publication of the report, various stakeholder forums have emphasised the need for a different approach, which is a key step forward. The work the Kenya govern- ment is doing on infrastructure — notably on the railway — improving efficiencies at the Mombasa port and reducing the cost bility of developing a sustainable mining sector rests with the government. Companies have a key role to play as well. The report identifies several characteristics of successful mining companies, such as maintaining deep, transparent relationships with government and communities, investing in infrastructure, job creation, skills transfer and patience, given the long term nature of project development. Finding the balance between the interests of government, local communities and investors is a challenge, but one that can be managed through open and honest relationships built on trust, predictability and mutual support. The goal for policy makers is to ensure they are nimble and flexible enough to respond to changing market circumstances. Cli≠ Otega is the managing di≥ecto≥ and head of ene≥gy and natu≥al ≥esou≥ces at Standa≥d & Mutual Ltd. EAC among states that adopted new measu≥es to cu≥b tax loss TURN FROM PAGE 41 in which companies declare taxes in Kenya and particularly multinational firms engaging in transfer pricing and abusive tax avoidance,” she said. Under the Africa Tax Adminis- tration Forum, the governments will in 2016 collectively draft proposals, including legislative changes, which countries will adopt individually. “Key among the developments have been amendments to treaties to mitigate against abuse and artifi- cial avoidance of a taxable presence in the source country and model legislations to strengthen domestic tax laws to deal with issues such as Controlled Foreign Corporations (CFCs),” she said. CFCs are companies whose major shareholders are in a separate jurisdiction, making a registered entity in another jurisdiction subject to the first country’s tax laws. KRA has drafted amendments to the Income Tax Act to deepen the definition of permanent establishment, review the thin capitalisation rule, strengthen transfer pricing KRA Commissioner-General John Njiraini. Picture: File legislation, and review existing limitation of benefits clauses. Other reviews underway that could feature in next year’s Finance Bill include proposals on CFCs and artificial transfer of assets to preferential tax jurisdictions by local companies. The countries are expected to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in order to benefit from information on country-bycountry reporting and access to private rulings as well as transaction information of businesses en- gaged with related foreign entities that may have led to less taxes being declared. Adoption of BEPS by Kenya, Uganda and Tanzania will eventually see the action plan extended to the East Africa Community; and Somalia and South Sudan have applied to join. “At an appropriate time, the EAC structures will be engaged to ensure that other EAC partners have the benefit of the exposure of the three countries to the BEPS work,” Ms Awuor said.